Cash Flow Collision

By David Kohl

Tue, 2010-12-07 (All day)

Many of the cash flow challenges started years before the down cycle, often in the profitable years

Economic cycles and volatility are here to stay

The other day I was visiting with a farm management instructor who works very closely with agricultural lenders. This past year he has been working intensively with dairymen who have been experiencing an extended down cycle. We were discussing some of the problem accounts and his facilitation work between producers and lenders. The following is a summary of our conversation.

Many of the cash flow challenges started years before the down cycle, often in the profitable years. In some cases, as a tax management strategy, producers purchased equipment and other assets that they could quickly depreciate to minimize taxes. Many financed these items through equipment companies with interest-free terms for up to one year. These transactions are now haunting them in a number of ways.

First, some producers violated financial covenants established in prior agreements with the lender who was their core traditional source of credit. These surprises led to delays or rejections for operating monies, and roadblocks in refinancing strategies created by the down cycle. Even worse, some producers were counseled to seek another lender because of these transactions and the decline in their financial position.

Another factor discussed was the postponement of regularly scheduled maintenance and animal husbandry practices when cash flows were pinched. This delayed maintenance resulted in engine and transmission overhauls costing thousands of dollars. Skimping on accepted animal husbandry practices can lead to higher future veterinary bills, and decreased production in the long run. It is like the old Fram oil filter tagline, “You can pay me now or you can pay me later.”

Economic cycles and volatility are here to stay. Proactively managing these economic swings by thinking through how short-run decisions can impact long-term viability will be a critical element in the success of a business. Failure to do so can result in a cash flow collision course that can be fatal to the business and producers’ family or lifestyle.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.